A team of researchers claim to have found a new way to make the Xbox boot the Linux operating system without using a mod chip, and is threatening to release details unless Microsoft approves an official system for running Xbox Linux.
The hackers involved, who are believed to be based in Australia, want Microsoft to release an official boot loader for the Xbox which will enable the use of the Linux operating system on consoles without any security bypasses.
If Microsoft won't discuss this with them, they say, they'll release information about their new Xbox hack onto the Internet - which will equally allow the running of Linux on the Xbox, but would also by its nature have the side effect of enabling the running of pirated games on the console.
The group's threat, which sounds suspiciously like blackmail to us, became public when they approached ZDNet Australia after repeated attempts to contact Microsoft failed. Microsoft now says the issue is with its piracy division.
Only a few months ago, hackers discovered that a bug in Electronic Arts' 007: Agent Under Fire game allowed them to run unsigned code from a memory card, which meant that they could effectively mod an Xbox with only a single drop of solder on the motherboard, and no physical mod chip.
This new exploit is thought to be different, however, and Xbox hacking website Xbox-Scene.com has suggested that it may be a more serious flaw in the security of the console - possibly a basic flaw in the Xbox Dashboard itself.
Of course, Microsoft is in a lose-lose situation here; it's arguable that game piracy wouldn't even be as damaging to the company's Xbox division as widely available Linux distributions would be, since these would see the Xbox being purchased as a cheap PC, media player or webserver. Given that Microsoft makes a loss on each hardware unit, this would mean that the loss-making Home and Entertainment Division was subsidising the sale of hardware to run Linux applications - not a prospect likely to bring smiles to the faces of people in the profit-making Operating Systems Division of the company.
It's hugely unlikely, then, that Microsoft will ever approve a Linux boot loader for the Xbox. We'll get to find out whether the hacker group at the heart of this latest security scare is bluffing shortly, as they claim that they'll release details of their exploit within weeks if Microsoft doesn't comply with their demands. For now, we suspect that Microsoft's decision is already made, and that the only people giving this issue serious thought at the moment are the company's lawyers, who will undoubtedly be considering their options for action against the group.